They have been playing with IRA changes in Washington for years. Some legislators want to take over your IRA feeling they can manage it better than you can. (That proposal of the past stated you could never cash it in). Others, felt it wasn’t fair to let you die and leave money to a child or grandchild and let them “stretch” the accounts’ tax deferred status for their respective lifetimes.
Based on new proposals, one passed by the House this month, it appears you MUST DIE by December 31st, 2019 in order to use the old rules. OK, I don’t want anyone pushing Grandfather over the ledge at the Grand Canyon on New Year’s eve…. just because you are named as a beneficiary of his large IRA account.
But an IRA redo will be necessary with your financial advisers by year end since it is predicted the Senate will also pass the IRA changes and it has been stated that President Trump will sign the new law, making it the law of the land regarding your IRA accounts.
One provision extends the starting date of current traditional IRA holders to start making Required Minimum Distributions (RMD’s) from the year after you turn 70 1/2 to age 72. BUT THE BIG change is for Inherited IRA accounts after your death. Every legal document dealing with your IRA’s will need professional review. The reason is that outside of a few exceptions for disabled persons receiving inherited funds, most beneficiaries (other than your spouse who you name and treats your IRA as “his” or “her” own) — will have just 10 years to get all the money out of the inherited account. If you do nothing, your beneficiary will get a 1099 lump sum distribution 1099 for the entire balance report-able in just one (1) tax year. Ouch!
Examining what that means — one must dig out beneficiary forms last filed and endorsed with the custodian of your account/s. Then, if you created any link from your IRA to your personal trust (named it as a beneficiary) or created a special stand alone (or stand alone at your death testamentary trust) for your large IRA account/s — I can predict some changes will need to be made in your documents. (General legal information regarding your trust instruments in force here, not legal advice)
Being a professional Realtor for many years, I especially see how bad this can be if you inherit IRA money as a non spouse and then buy a self directed IRA account funded with rental real estate. Granted, 10 years would still be a long term growth cycle on your money and at traditional real estate growth rates - perhaps provide a chance to see values double. But whether you sell the property held by the Inherited IRA or not, the 10 year mark will trigger a 1099 for the full value of the rental home! One can not easily sell 1/10th shares of a self directed IRA account in real estate to try to spread re-portable income over multiple tax years. (A common tax trick)
I suppose you could let it grow 5 years and then convert to more liquid holdings more common with regular IRA accounts such as bank and brokerage products. Then start by cashing in 1/5th shares to spread over 5 years of tax reporting, hoping the tax rate is lower than one big lump sum reported in the 10th year. Any way you cut it, all money paid into the IRA and all growth earned internally in a a SDIRA has to be out the door at the end of the 10th year.
The neat 80 year stretch we could do with grand kids, or 40 year stretch with your kids (give or take a few years) is soon to be history January 1, 2020. So, think about getting a free review of your IRA accounts early with a multi-licensed financial adviser. I can assist you in trust document amendments as well as explain the tax issues in an IRA redo plan.
M.D. Anderson, President
Financial Strategies, Inc.
PS: Starting your self directed IRA in real estate now while you are alive and well now has more credence than before. I can assist you in that as well.